Soft drink rates to inflate by 5% to 10% soon

Rs. 22,000-crore soft drinks industry is likely to be the hardest hit as the increase in taxes comes at a time when firms' capacity utilisation is already less than 40%Ratna Bhushan | ET Bureau | May 20, 2017, 09:14 IST

(Thinkstock Images)Soft drink firms plan to increase prices by 5-10% to offset higher tax outgo under GST regime while makers of shampoo, ayurvedic products and confectionery said they are yet to take a call on the matter.

As per the goods and services tax rates finalised by the GST council, all these product segments will attract 3-8% higher taxes after July. While soft drinks will attract 40% GST, up from total taxes of 32% now, tax on ayurvedic products will more than double to 12% from 5%. Within confectionery, taxation will go up to 18% from 15% for candy, and to 28% from about 22% for gums. In the case of shampoo, taxes will rise to 28% under the GST regime from 23%.

The Rs 22,000-crore soft drinks industry is likely to be the hardest hit as the increase in taxes comes at a time when, according to a top official in a soft drinks firm, capacity utilisation is less than 40%.

“Prices will go up and demand could drop,” the official said on condition of anonymity. “Further, there’s no incentive for lowsugar beverages. In the past three years, taxation on soft drinks has gone up 12%.”

A statement on behalf of Coca-Cola and PepsiCo, issued by Indian Beverage Association (IBA), said the companies were “extremely disappointed”, and that the move would have a “negative ripple effect” on bottlers, retailers and distributors.

Another industry official said the two major players are facing slowing sales because of lower consumer spending on discretionary products and competition from small, regional brands selling 15-30% cheaper.

While soft drinks firms said a price hike was inevitable, ayurvedic product makers Dabur and Patanjali Ayurved said they would factor in input credit adjustments before taking a call on price hikes.

Baba Ramdev’s Patanjali Ayurved said there would be no price hikes upfront despite the steep rise taxation. “Since input costs are being reduced, we will absorb differential costs,” company spokesperson SK Tijarawala said. “Initially, we will not pass on any hike to consumers, and review the price strategy at later stage,” he said.

Tijarawala said the company would request the government to consider reviewing the GST on the ayurveda category. Confectionery prices are likely to increase upfront.

“We will evaluate increasing prices since for gums, tax increase is steep,” said Ramesh Jayaraman, managing director at confectionery category leader Perfetti Van Melle. “Since our business model is based on affordability, this tax increase is a significant setback for us.”

While taxes on shampoo will rise 5%, players such as Dabur said they would take a call on price increase after studying the full impact.

“Except for home care products and shampoos that now attract 28% GST, most FMCG products have been placed at 18% or below,” said Lalit Malik, chief financial officer at Dabur.

“We are awaiting clarification on service tax and excise exemptions, post which we will be able to calculate the full impact. Overall, the new rates are marginally favourable.” Taxes on packaged juices and water will not change when GST is implemented in July.